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WFT earnings call for the period ending September 30, 2018.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the Weatherford International third quarter 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, people press the # key. We ask that you limit yourself to one question and one follow-up, then reenter the queue for any additional questions that you may have. As a reminder ladies and gentlemen, today's call is being recorded.

I would now like to turn the conference over to Karen David-Green, Vice President of Investor Relations, Marketing and Communications. Ma'am, you may begin your conference.

Karen David-Green -- Vice President, Investor Relations

Thank you, Carol. Good morning, and welcome to the Weatherford International third quarter conference call. With me on today's call we have Mark McCollum, President and Chief Executive Officer; and Christoph Bausch, Executive Vice President and Chief Financial Officer. Today's call is being recorded, and a replay will be available on Weatherford's website for 10 days.

Before we begin with our prepared statements, I'd like to remind our audience the some of today's comments may include forward-looking statements. These matters may involve risks and uncertainties the could cause our actual results to differ materially from our forward-looking statements. Please refer to our latest Form 10-K, 8-Ks and other SEC filings for risk factors and cautions regarding forward-looking statements.

A reconciliation of GAAP to non-GAAP financial measures is included in our third quarter press release and accompanying presentation, which can be found on our website. Christoph will now provide an overview of our third quarter results, followed by Mark's comments on our strategy and the progress of our transformation. Following these prepared statements, we welcome your questions. And now I'd like to turn the call over to Christoph.

Thank you, Karen. Revenue in the third quarter of 2018 was $1.44 billion, essentially flat compared to the second quarter of 2018, and slightly lower than the $1.46 billion of revenue reported for the third quarter of 2017. Sequentially, seasonal improvements in Canada, activity increases in Continental Europe, and deliveries of liner hangers delayed from the previous quarter were offset by lower activity levels in the United States, and foreign exchange impacts in Latin America.

On a year-over-year basis, higher revenues associated with integrated services projects in Latin America were offset by lower activity levels in Canada, as crude oil differentials expanded, reducing demand for completions and production services and products. Results in Russia were also negatively impacted by adverse foreign exchange rate impact, although activity levels remain broadly flat.

Operating loss for the third quarter of 2018 was $13 million. Segment operating income in the third quarter of 2018 was $160 million, up $47 million or 68% sequentially, and up $123 million year-over-year. The sequential improvement was mainly driven by seasonal activity increases in Canada and higher margins across all segments on reduced costs and improved efficiencies as a result of our transformation efforts.

Significant year-over-year operating income improvements were due to improved operating efficiencies and reduced expenses as a result of our transformation. Higher revenues in Latin America produced solid incremental margins, which more than offset relatively weak results in Canada. Non-GAAP net loss for the third quarter of 2018, excluding unusual charges and credits, was $103 million or $0.10 diluted loss per share. This compares to a $156 million non-GAAP net loss in the second quarter of 2018 or $0.16 diluted loss per share, and a $221 million non-GAAP net loss for the third quarter of the prior year or $0.22 diluted loss per share.

In the quarter, we recorded pre-tax charges of $95 million. Of this amount, $71 million were non-cash impairments and asset writedowns, the majority of which related to land drilling rigs, adjusting for the divestiture group following several changes during the quarter. An additional $27 million were changes related to restructuring and transformation, and $8 million related to currency devaluation charges in Angola. These were partially offset by an $11 million credit related to the fair value adjustment of the outstanding warrant.

Moving on to our results by hemisphere. In the Western Hemisphere, third quarter revenues of $762 million were down 1%, both sequentially and on a year-over-year basis. Compared to the second quarter of 2018, revenues in Canada grew seasonally as the rig count increased following the spring breakup, but were offset by lower top line contributions in the United States and negative foreign exchange impacts in Latin America.

Year-over-year revenue increases related to integrated services projects and market activity improvements in Latin America were offset by lower activity levels in Canada as a result of increasing crude oil differentials driven by pipeline takeaway capacity constraints. Third quarter Western Hemisphere segment operating income of $78 million was up $28 million sequentially, and up $75 million year-over-year.

The sequential increase benefited from lower expenses and improved operating efficiencies associated with the transformation. The year-over-year improvements were mainly driven by a combination of higher activity levels in Argentina and Mexico, combined with the positive impacts from our transformation initiatives, which overcame lower operating results in Canada and adverse foreign exchange impact in Latin America.

In the Eastern Hemisphere, third quarter revenues of $682 million were up $3 million sequentially, but decreased by $11 million or about 2% year-over-year. Compared to the second quarter of 2018, higher revenues from managed pressure drilling in the Mediterranean and liner hanger systems deliveries in the United Arab Emirates, Iraq, and India were offset by lower drilling rig activity and completion sales in the Middle East.

On a year-over-year basis, higher drilling revenues in Continental Europe and completion sales in the Arabian Sea zone were offset by lower land rig activity and adverse exchange rates in Russia. Third quarter Eastern Hemisphere segment operating income of $38 million was up $19 million sequentially and up $48 million year-over-year. The sequential improvements resulted from seasonably favorable completions and construction revenue mix in Russia, combined with the positive impacts of our transformation efforts.

Compared to the third quarter of 2017, costs were down across the Eastern Hemisphere as a result of the implementation of various transformation initiatives. Higher operating margins in the Middle East and Asia also contributed to the positive variance.

Net cash used by operating activities was $32 million for the third quarter of 2018, impacted by cash payments of $156 million for debt interest and $20 million for cash severance, restructuring and transformation, offset by segment operating income. Total net free cash flow in the quarter was -$67 million, including capital expenditures of $55 million and proceeds from asset disposals of $20 million. On an adjusted basis, free cash flow was a use of approximately $35 million during the third quarter, excluding cash severance, restructuring, and transformation costs and capex associated with our international drilling rigs.

Third quarter capital expenditures of $55 million included $12 million of capital investments in our drilling rigs business. Apart from the drilling rigs, the largest investments during the quarter were in our drilling and evaluation segment, highlighted by outlays for new directional drilling and wireline tools.

Customer receivables decreased by about $12 million, and overall DSO was flat compared to the previous quarter. The overall DSO stayed at 73 days, with slightly slower average collection times in the Western Hemisphere, offset by improved collection times in the Eastern Hemisphere compared to the previous quarter. Inventory decreased by $46 million as a result of our initiatives to better manage inventory levels and manufacturing processes.

Our transformation initiatives delivered sequential recurring improvements that were in line with the guidance provided on the previous conference call. In the third quarter 2018, recurring benefits associated with the transformation were approximately $27 million, which combined with the amounts realized during the first half of the year, put us at an annualized EBITDA run rate of about $300 million, or about 30% of our overall goal.

During the third quarter, we continued to see steady progress from our operational segment and product lines and sales and commercial workstreams, which reached 65% and 34% of their total targets, respectively. These are two of the largest workstreams, together representing over half of our $1 billion EBITDA target. The manufacturing workstream recorded its first recurring EBITDA benefits as we closed and consolidated facilities. Procurement is beginning to gain traction, as we start to execute the individual initiatives and the depth plans in line with the market environment. We expect to see steady progress from all of the workstreams during the fourth quarter.

Adjusted free cash flow, excluding severance, transformation cash costs, and land with capex was -$35 million, short of our goal of positive cash flow for the quarter, but a significant improvement versus our results for the first half of this year and compared to 2017. Net working capital was a source of cash during the quarter, as cash conversion from inventory continued the positive trend we experienced at the end of the last quarter. We expect overall days sales outstanding to decrease during the fourth quarter of 2018, as is typical for Weatherford historically.

Transformation and restructuring costs during the quarter were $27 million, including provisions for severance and advisor fees. We expect the incremental recurring EBITDA benefits from our transformation efforts to exceed a run rate of 40% of our overall targets by the end of next quarter. To date, we have completed action plans for specific initiatives that should provide the opportunity for almost $600 million in recurring run rate benefits over the coming quarters.

Recently, we announced the sale of our laboratories business for cash consideration of $205 million. This transaction represents a significant step in the process we have undertaken to focus on the core product lines that represent the best long-term value for our company. Closing this deal will further improve our financial leverage and overall debt metrics. We are pleased to announce this transaction at these terms. It fits our strategic rationale and will create long-term benefits for Weatherford, while providing an opportunity for the business to grow more quickly with new ownership who can fully focus on this business.

The laboratories sale represents another large divestiture that moves us closer to our long-term goals. This deal, combined with the previous sales of certain of our international drilling rigs, will provide gross proceeds of approximately $500 million to paying down debt and funding our ongoing transformation initiatives through 2019.

Current market conditions are not conducive to us setting specific sales proceeds or timing targets for the remaining transactions, although we continue to work to sell individual non-core product lines, market our remaining land rigs, and divest other small assets and businesses. We remain committed to focusing on our core businesses and further de-levering our company, and we will not enter into deals at terms that are inconsistent with these strategic objectives.

That being said, the sales of our largest plant transactions that will continue to positively impact our capital structure. We continue to expect the closings of our previously announced transactions to be substantially completed by year end, subject to regulatory approvals, consents, and other customary conditions.

Moving on to our outlook. In the fourth quarter of 2018, we expect total revenues to be relatively flat compared to the third quarter. Growth in typical year-end product sales are likely to be offset by stalling activity levels in the United States, where we expect some declines at the end of the year related to the remaining E&P budgets and typical holiday and weather delays.

Further, inflationary and foreign exchange pressures in Latin America, and seasonality in Russia will negatively impact operating results in the fourth quarter. These factors are likely to result in a lower sequential EBITDA, despite the uplift expected from the continued progress on our transformation efforts. We are forecasting EBITDA to decrease by low to mid-single digits sequentially during the fourth quarter of 2018.

Despite these headwinds, we anticipate a similar sequential improvement in free cash flow during the fourth quarter, mainly as a result of working capital improvements. Cash interest expense and cash taxes are expected to decrease during the fourth quarter. Capital expenditures are estimated to be between $80 and $90 million during the fourth quarter. These factors suggest positive free cash flow for the fourth quarter. Our top priority continues to be improving our internal processes with a primary focus on cash flow generation. With that, I will turn the call over to Mark.

Mark A. McCollum -- President and Chief Executive Officer

Thank you, Christoph, and good morning, everyone. I'm pleased with our third quarter results, especially the accelerating trajectory of our transformation path. Our transformation efforts have added approximately $150 million in incremental EBITDA compared to the 2017 baseline. This amount represents approximately 75% of the total EBITDA increase for the first three quarters of 2018 versus the first three quarters of 2017.

Thousands across the organization have come together to drive our transformation forward. Because of their commitment, we're are carrying out initiatives that will continue to deliver improved financial results and add long-term value for all of our stakeholders. I'll revisit these in a few minutes to give you our cumulative progress on the transformation initiatives and some details behind each workstream.

Our progress this quarter has not come without some bumps on the road. Revenue was flat sequentially versus our expectation of mid-single-digit growth. Some of the variance was created by our own choices, such as when revenues were decreased when we started turning down unprofitable contracts. But we also experienced transitory supply chain issues and manufacturing inefficiencies that decreased top line results during the quarter.

Adjusted free cash flow came in about $35 million below our goal of break-even for the quarter. Although we fell short of our target, we've made significant improvements in this metric, both sequentially and on a year-over-year basis. Continued challenges converting working capital to cash are mostly to blame for the lower-than-expected cash flow results. Make no mistake, we have a laser focus on these issues and we have initiatives in place to keep us moving in the right direction.

The transformation initiatives are not designed to solve small problems one time and then move on. In order for this massive integration program to be successful, each item, each process must be evaluated to drive out systemic inefficiencies causing us to waste time and money. From the sales organization all the way to the payroll department, we're working to rectify historical issues. Transformation is hard work, and the organization is using muscles it's never used before. However, I see the results first-hand every day. As we progress, I'm confident that we're solving issues more quickly and finding additional opportunities for improvement beyond our original scope. This is an ongoing process and these positive trends will intensify to deliver even stronger performance results.

So where are we in the transformation process? Well, as Christoph talked about, through the first three quarters of our two-year plan, we have added an annualized run rate of approximately $300 million of EBITDA, or an almost 75% increase over our 2017 EBITDA. Based on the guidance for the fourth quarter, we expect our EBITDA for 2018 to increase over last year by approximately 80%, well outpacing our peer group, with the transformation responsible for about three-quarters of the overall improvement. As of today, we have completed the necessary work for nearly $600 million in recurring EBITDA improvements.

We're working against a timeline to complete initiatives with a value of $1 billion by the first quarter of next year. Our experience to date suggest that it takes a few quarters for these improvements to actually hit the P&L statement. As such, I remain confident that we'll see it in the run rate by the end of 2019. We're focused on ensuring each of our initiatives delivers the promised positive impact to our bottom line.

Now I'd like to take you through the group's dedicated executing initiatives in generating value, our workstreams. Our manufacturing workstream made the largest contribution to our overall progress this quarter. And we anticipate that in the fourth quarter, it will show a significant increase compared to year-to-date results.

As a global provider, it's critical that our manufacturing footprint operates as an efficient engine, scales appropriately, and offers best-in-class capabilities to our customers. To support this initiative, the workstream has consolidated operations from four facilities, and is currently rationalizing our manufacturing footprint with larger, purpose-built facilities in fewer locations. While we optimize our supply chain, we remain focused on maintaining service continuity, and we're committed to improving our manufacturing deliveries before year-end. The demand for some of our technologies, such as our sucker rods and new Rotaflex long-stroke pumping units have outpaced manufacturing, even while producing at near-full capacity.

As we move forward, implementing transformation initiatives will help us to better serve our customers in a more efficient and cost-effective manner. Our logistics and distribution workstream has also realized a substantial amount of savings. As one example, the workstream is implementing centralized trucking in the United States for a recurring annual benefit of approximately $4 million. It has also starting to implementing freight pay and auditing in North America for recurring annual benefit of $3 million.

The procurement workstream is starting to gain traction as well. We've been working to consolidate our purchase of similar parts and materials with the same vendors. We have released requests for proposal representing $840 million of annual spend. We expect them to start delivering value and impacting the P&L this year and into the next.

Within the G&A workstream, transformation initiatives related to streamlining IT services have resulted in recurring annualized cost savings of $16 million. This result represents the benefit of work we've undertaken since the beginning of the transformation process.

The rest of our workstreams are completing initiatives at a steady rate, and we should continue to advancement. I've stated many times before that accomplishing these self-help initiatives is critical to increasing our recurring EBITDA and establishing a solid foundation for the company going forward. The sooner we get our work done, the sooner our stakeholders will reap the benefits.

As we execute our transformation initiatives, we also remain focused on delivering daily for our customers. This quarter is no exception. As one of our newly articulated core values, flawless execution is a standard that we're working toward every day. The organization is embracing the positive correlation between exceptional safety and service quality, delivering customer value and profitable growth. Our year-to-date performance reflects our commitment to this principle. As market activity has continued to increase, we've surpassed our goal for reduced non-productive time in 2018. To add to that, we have completed work without a lost time incident for 98% of our customers. This type of consistent performance is key to a trusting customer relationship, no matter where we operate.

In the United States, we've seen promising results from product commercialization across our portfolio. For example, the demand for our PressurePro Control System, launched in the fourth quarter of 2017, is exceeding our production schedules. We plan on increasing deliveries in the first quarter of 2019, and expect to be sold out for the remainder of next year. Likewise, the commercialization of our new and improved Rotaflex long-stroke pumping unit in the second quarter of this year is surpassing expectations. In short, our customers are energized by the value of the new unit. It increases its production with fewer strokes, reduces lifting cost, streamlines maintenance, and enables the cost-effective transition of rod-lift earlier than ever. We are doubling our manufacturing rates to meet demand in North America.

Another technology with high customer demand is our Magnus rotary steerable system, which as you know, we launched earlier this year. In fact, the footage drilled and revenue booked has undergone a significant increase. In the month of September alone, the footage drilled increased by 68% and the revenue increased by 52% over the year-to-date totals through August. Magnus has received very solid reviews from our customers. In Mexico, we drilled an entire well. And along with our RipTide reamer, we drilled and reamed a well with a 42-degree profile. We've also used it in some of the most challenging unconventional sections, and it did not disappoint. In the Permian, we mobilized in 10 hours to finish a competitor's job, and we reached the Magnus tool's deepest depth in the process. And last but not least, in the Eagle Ford basin, we displaced an incumbent and drilled two wells flawlessly, by achieving a higher rate of penetration than the customer's previous tool.

The next frontier for our RSS is the Middle East, where the mobilization is now in full swing. The Magnus is working, it's proving itself, and we're building them as fast as we can to keep up with the growing demand. Having the technology is one thing. We can definitely offer our customers impressive tools, such as our Magnus RSS, Rotaflex unit and PressurePro system. But we also offer the expertise to deploy these new tools in the right context and with other existing technologies to provide customers with high-value integrated solutions.

In one such case, we replaced a major competitor in the Permian because of our strong technical capabilities in formation evaluation. Our in-zone well placement services, combined with our respectful way of logging while drilling technology, is helping our customers with real-time well projectory strategy, while increasing wellbore exposure.

In the Eastern Hemisphere, we have made steady progress with the Weatherford ESP through the Valiant Alliance. During the quarter, we finalized the agreement, and worked hand in hand with Valiant to qualify this technology with key customers in our target markets. I'm happy to announce that we have agreed to the first deployment of our ESP system with a prominent national oil company in the Eastern Hemisphere. And this is not a single technology transaction.

Let me explain. Only Weatherford offers complete production solutions for every form of lift in every production environment. First, we offer all forms of lift so that we can devise true lift-agnostic solutions. Second, we offer everything needed to optimize each form, from down-hole components to surface equipment, to intelligent production optimization systems. We call this an end-to-end solution.

Our Eastern Hemisphere customer is taking advantage of our differentiated end-to-end ESP solution for a high gas-to-oil ratio well with flow rates ranging from 230 to 1,200 barrels per day. We're currently mobilizing equipment for the first two wells, including all hardware, automation and our industry-leading ForeSite optimization platform, the latter of which will mitigate gas lock in this particular application.

Further, we're simultaneously working with this customer to optimize their gas-lift assets with our smart gas lift and ForeSite technologies, as well as piloting new hydraulic jet and rod-lift programs. And speaking of our digital production software, we recently released our ForeSite and Signet software platforms on the Google cloud to reduce costs and infrastructure requirements. Essentially, the collaboration places a virtual network of IT professionals and computing power right at our customers' fingertips. With the Google cloud, operators can easily deploy and access our software to maximize uptime per dollar spent.

Next month, at the 12th Annual Weatherford Enterprise Software Conference, we have an exciting announcement for our ForeSite production software suite. We've already integrated features such as the cloud and advanced analytics. Now we're expanding the suite even further to deliver high-frequency data and intelligent alerts, and autonomous control.

Also in the Eastern Hemisphere, we have a field trial in the works for an unprecedented solution, a system that transforms the risk-and-reward equation in deepwater. We combine radio frequency identification, or RFID technology, with our premium completions equipment into one tool, our trip completion system. This system enables installing the upper and lower completion in one trip, which can reduce installation time by 35% to 40%.

By using RFID technology, the trip system eliminates the need for control lines, wash pipe, wireline, coil tubing and workover rigs. The result is 100% intervention-free operations that enhance safety, increase efficiency, and improve predictability. The reliability of our trip system is bolstered by our 10-year track record for successful RFID activations. We've also made significant strides for our Eastern Hemisphere customers with our integrated services. Our project managed well-abandonment services leverage components from the entire Weatherford suite.

One such project included drilling and rental tools, fishing services, well-bore cleanup, and tubular running, among others. In the end, the services enabled plugging and abandoning 13 platform wells in the North Sea 125 days earlier than the customer originally planned. We've been accumulating these kinds of customer success stories since the beginning of the transformation. Together, the transformation and our technologies create these successes. In turn, these successes increase our EBITDA. This chain of events creates a virtuous cycle for continuous improvements in the future to strengthen our company as a whole.

As for the future, we expect rig counts and overall operator spending to increase again in 2019, similar to this year. Despite recent concerns in the 2019 oil demand forecast, we still foresee a favorable supply and-demand backdrop for the oil-and-gas market. We are beginning to see green shoots in activity in shallow water and harsh environments. We believe tendering activity for longer-term deepwater projects will have more of an impact on 2020. All of these variables point toward our positive trajectory in 2019, which we think should result in high single-digit spending increases year-over-year by operators.

Now, our 2019 market outlook may be a bit less optimistic than some of our peers have expressed. In spite of that, we must remember that the EBITDA growth attributed to our transformation initiatives is somewhat separate from robust market activity. The transformation is really what's going to drive the numbers. That keeps everyone's feet to the fire in executing the transformation. And if the market's better, that will be just be icing on the cake.

Since we began our transformation, we've announced several divestitures. Most recently, we announced the divestiture of our laboratory services worth $205 million. All in, our cumulative progress will amount to more than $900 million. When we complete all these sales, we'll have brought our largest transactions across the finish line. The deals to date have been harder to get done, and have taken more time than I would have ever thought given their size. So going forward, we're going to stop prognosticating about timing. We're still aggressively working on the same remaining basket of deals we originally said we would do, but they will get done when they get done. Our main priority is to continue executing on the transformation. I'm confident that we'll achieve our $1 billion incremental EBITDA run rate target in accordance with our original timeline.

There's a tremendous amount of opportunity within Weatherford, and I believe we're just starting to see what improvement this company is capable of. We have the right people, processes, and technology in place to ensure long-term stability, profitability, and growth. In the months ahead, I look forward to realizing our vision for our transformed organization. With that, I'll turn the call back over to the operator. Carol?

Questions and Answers:

Operator

Thank you. At this time, I would like to remind everyone in order to ask a question, please press * followed by the number 1 on your telephone keypad. We ask that you please limit yourself to one question and one follow-up, and reenter the queue for any additional questions that you may have. Our first question comes from James Wicklund from Credit Suisse. Please go ahead.

James Wicklund -- Credit Suisse -- Analyst

Good morning, guys. Sorry you missed your goal on cash flow, but at least you were close. Mark, everybody has looked at the Middle East as nirvana for oilfield services, and everyone's been signing up long-term lump-sum contracts and everything. Why was your service revenue lower in the Middle East? And is this something that is specific to Weatherford? And where do you see that going? Talk to us about Weatherford's operations results and potential in the Middle East specifically, if you could.

Jim, it's Christoph. We'll split the answers, and Mark will cover the second half. But one of the main reasons is drilling rigs has reduced. And that's several rigs came off contract to go through a normal recertification process, which will take a couple of months. So that's one part of the reduction. The other part of the reduction was a temporary reduction in one country related to some tools which were not available during the quarter. And I think that explains a little bit the sequential. And Mark will talk a little bit about going forward.

Mark A. McCollum -- President and Chief Executive Officer

I think the outlook for the Middle East for Weatherford is very similar to our peers. I mean, we still look at very constructively, as Christoph said, in the quarter, there were some transitory things that happened around rigs and availability of tools. But we have been over the last couple of quarters mobilizing into some very large wireline contracts. When we get the Magnus tool up and running, and we're about to run it through its paces on several wells there in the Middle East, we expect big ramp-up. There is a big demand from customers, a lot of interest in using that tool. And it should be very well-oriented to working in that particular region.

We have been, like others, looking at, participating, tendering around the margins for some of the LSTK work that's been coming down. We haven't necessarily won any of those contracts. I mean, in part, given our financial constraints, because are having to be smarter about pricing than some of our peers have been. I mean, there's a lot of obviously enthusiasm about some of the activity levels, but that's coming at a price. You've heard [inaudible] and those contracts have been very, very aggressively bid. I think that's not necessarily a road that we're going to go down. We're going to be smart about what we do and how we tender. But that doesn't mean that there won't be opportunities around the margins, not just with additional contracts, but also working into some of those contracts.

We've already seen that, in some cases, our peers don't have all the right tools for those contracts and the commitments. And so they're reaching out to us as a subcontractor, and hopefully, we can work into those contracts well and price them effectively.

James Wicklund -- Credit Suisse -- Analyst

The technology development that you guys are coming up are interesting with because most people don't think of you guys, as Weatherford particularly leading in technology and it's getting obvious that you do. You mentioned in the press release that you displaced an incumbent in Brazil in a new tubular running contract, and that you've been awarded work on 14 deepwater rigs. I remember back when the deepwater rig count was huge, and well construction was lucrative. You say you're seeing green shoots that will grow with you in 2020 for deepwater, but 14 deepwater rigs, how many deepwater rigs are you working on in total around the world now, so we can get an idea of the increment that is?

Mark A. McCollum -- President and Chief Executive Officer

Boy, Jim, I don't know that I have the answer to that question. I mean, it's not as many surely as we would like to. But we continue to hold in and do fairly well. I mean, obviously Weatherford's well construction technology, particularly around tubular running and managed pressure drilling, are considered sort of best-in-class. And we continue to work in that environment. We've got the new AutoTong technology we call [Varro]. That's been introduced and having a lot of customer interest in that technology.

And so we're excited about it. It's just as we look forward, recognizing that the economics still aren't there, in our view, to justify a significant increase in the deepwater rig count, we think that later on in 2019, we're going to start seeing a wave of tendering activity getting ready for spending in 2020. That seems to what the customers continue to signal to us. And so we're trying to make sure that we're ready, continuing to introduce new technologies in this space to stay at the front of the pack. And at the margin, being able to pick up contracts where we might have lost them as a result of some pricing moves on customers, but now they're coming back for quality. And hopefully filling some of the gaps along the way.

James Wicklund -- Credit Suisse -- Analyst

That gives you an extended runway. I like that. Okay, guys. Thank you very much.

Mark A. McCollum -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from James West from Evercore ISI. Please go ahead.

James West -- Evercore ISI -- Analyst

Good morning guys.

Mark A. McCollum -- President and Chief Executive Officer

Hi, James.

James West -- Evercore ISI -- Analyst

Mark and Christoph, obviously the cash conversion is key here, DSOs, DSIs, getting those down is key. I know you're talking about cash generation in the fourth quarter. Is that baked -- given what you're seeing with your inventories, etc., is that kind of baked in now at this point? I mean, you're getting a lot better, you're getting closer to that. But having free cash flow, is that kind of a foregone conclusion for 4Q?

I'm not sure how you define foregone conclusion, but that's our estimate, James. Maybe I'll go back a little bit. In Q2, we had a significant miss on working capital because of a lot of seasonal effects coming out of the Middle East. Those two partially have reversed in Q3, so we called up some. We had of a little bit more than normal delays in the Western Hemisphere, and as to some integrated projects, which have a different billing profile, and some effects in Canada, which had very low revenue in the second quarter, which means there is less collection in the third quarter.

As we go into the fourth quarter, we will probably reduce our DSO, as I've talked about, so that will have a positive effect. We will further improve on our inventory. And I think I said that in my prepared remarks, based upon the various action items we have already taken. And we will see a slight improvement on our accounts payable. So that will all help into Q4. And plus our forecasted EBITDA and capex levels, and slightly lower cash for taxes and interest.

Going into 2019 and I don't want to go too far out, but whatever you mean foregone conclusion, for us, this is imperative. Going into next year, we will generate positive cash flow. And there might be some seasonal differences in one or the other quarter, but for the entire year, we will generate positive cash flow in 2019.

Mark A. McCollum -- President and Chief Executive Officer

Let me see if I can back up, James, up for second, if you'll indulge me to give a little bit of color commentary and remind folks what I've been saying. In order for us to be cash flow positive from EBITDA, we need to be generating nearly $1 billion, around $1 billion of EBITDA. That's because between the interest burden of nearly $600 million, capex, cash taxes, all those things sort of are roughly $1 billion of fixed outflows that we have to cover. And they are what they are.

I mean we can de-lever at the margin, but as the market improves, it's very difficult to bring capex down. Selling the rigs and getting that closed will help in that regard. But roughly $1 billion has been that number, that bogey that we're aiming for. We knew coming into the year as we tried to guide the Street, that we weren't going to necessarily get all the way there, even though it was a substantial increase over 2017, that we would probably still fall somewhat short in 2018 for generating break-even cash flow. And the intent always was to get a couple hundred million dollars out of working capital to fill the gap.

Most of that had to come from inventories because that's where the real excess lies. I mean our DSO statistics are, I think, the best of the peer group. Our payables are in line with others. And given where our credit is, you can't see that as a tremendous source, but clearly inventories. But the thing that we've been having difficulty overcoming this year has been that working capital, particularly inventories, have been intransigent. It's just been difficult to get out. It has been sitting in the wrong place. It's the wrong stuff built for deepwater, whatever. And as a result of turns, we've then had to do some extraordinary things.

Now, the transformation team has been working very diligently to start getting that. And we turned the corner in the third quarter after July. And now the inventories now are coming down roughly about $15 to $20 million a month. And we project that that will continue, but it's been, I'll tell you, it's been rough sledding to get there. What we didn't see and what kind of worked against us this year was that, particularly our receivables, that our DSOs increased, partly as a result of some customer actions. And I think as we approach the end of this year, we're seeing North American customers paying somewhat more slowly than they had been, and some other things.

So we're continuing to focus and zero in to work on that, but we had to get more out of working capital in Q3 in order to be cash flow break-even for the entire year to have a shot. And I think as we look at Q4 and the market beginning to soften a little bit, where even though that may help at the margin working out, but we're a little nervous that, that we're not going to be able to accelerate pulling working capital down more than we did in Q3.

And so that's where you're getting that forecast. I mean, the transformation is working. We're improving our earnings along the lines that we believed that we would. The working capital opportunity remains. We still think we can get it, but the pace of getting that out has been slower than we wanted. And it's going to sort of back-end load the opportunity into 2019.

James West -- Evercore ISI -- Analyst

Okay, fair enough. Then Mark, on our 2019 outlook in the Middle East, you mentioned you see revenue growth maybe less than some others, but with the transformation, it seems to me just simple back-of-the-envelope math that your EBITDA growth should outpace the rest of, at least your large, diversified peers. Is that a fair statement?

So with the comments regarding the asset sales and not committing to further timelines, being patient for proper valuations, all that seems totally fair. But does that suggest the work you've done so far, maybe the market for those assets hasn't been as robust as you thought? Maybe help us understand more the reasons for the shift in mentality here.

Sean, it's Christoph. It's essentially two points. The market's been actually good for our laboratories business. We had a lot of interest in that. To get to the very end took time. And one of the things is once you go out publicly and commit to something, that plays into negotiations. And we simply don't like that. So that's the reason why we want to take that timeline off. As Mark pointed out and I mentioned as well, we will continue to work on the targets we had identified, but we don't commit to timing and amounts. We want to do that in our pace and to make sure that we really achieve the best outcome for our group.

Now, the M&A market as you know, for certain businesses is not the best, and particularly around North America for non-differentiated businesses, and there are many IPOs on the market as well who don't launch. So from that perspective, I think that needs to be taken into consideration. But for the various businesses we have, I think they're quite focused to get that done at our time.

Mark A. McCollum -- President and Chief Executive Officer

Bottom line, our transparency and commitments around dates, actually this is buyer's market for M&A, and they've been used against us a little bit. At least we perceive that. And so we're taking that stick out of buyers' hands. We're going to do the right deal. We're going to do it for the right values, given what these businesses do and perform. We'll deliver when we get them done. So we're still working on them. Same process. Internally, nothing's changed. The only thing that's changing is my laying out a specific timeline commitment.

Sean Meakim -- J.P. Morgan Securities -- Analyst

Got it. That's very helpful. Thank you for that just one detail. I don't think I heard anything about the $500 million of the one-time cash benefits that you had identified. I think maybe we were trying to get to somewhere like 60% of that by the end of this year. Can you maybe give us an update on that portion of the transformation.

Mark A. McCollum -- President and Chief Executive Officer

That's what I was speaking to. The lion's share of the one-time cash benefits is coming out of working capital. Roughly $350 million, I believe, Christoph, of the $500 million is working capital reductions. And that's been the bugaboo us this year in terms of getting things out of inventories. In other categories, such as some of the miscellaneous property sales, some of the excess land as we consolidate field camps or manufacturing, those are going right along just as the timeline.

I think for the year, all total within the transformation, we will get a good portion of those completed. It's the working capital area that for the year, as I said, we were expecting to get several hundred million dollars out of working capital as a source of cash this year. And you can look through three quarters that we're certainly short of that goal.

Good morning. I have a few questions here for Christoph. Christoph, with regard to your guidance for fourth quarter in terms of Q4 witnessing a similar sequential rate of improvement as in Q3, was that for operating cash flow or free cash flow?

We just said we're not going to go forward and put exactly the timing on that. What we said that the maturity of the ones we have announced will close before year-end.

William Herbert -- Simmons & Company Intl. -- Analyst

That's what I'm talking about. I'm not asking about the ones that are in purgatory due to being a buyer's market. I'm asking with regard to the ones that you basically announced deals on, so I can get to basically a pro forma debt number.

Yeah, and you the number we announced for rigs at $287.5 million. We announced laps at $205 million. Those, as we said, the maturity will close for sure at year-end. There are a little bit of fees attached to that. That will be the number.

We'll talk about that in the modeling later on, if you're OK with that. Because it depends a little bit on when the rest of the rigs will divest. Based on that, the DD&A will change, obviously.

William Herbert -- Simmons & Company Intl. -- Analyst

Okay. Sorry. One quick one for me. Pro forma capital spending on a quarterly basis. If you think about just conceptually 2019 with the sale of the capital intensive land rig business, or at least part of it. What does that go to?

Good morning. Just one question for me. As I think about the Q4 revenue guidance of flattish sequentially, I'd like to think about the business units that drove those revenues. So any incremental color you can provide in terms of which of the four business units you expect to see the most seasonality offset by the product sales? Just trying again to think about the Q4 top line guidance in context of the four business units.

Byron, there's a couple of points we guided toward in our prepared remarks. Latin America will have a full quarter of inflationary effects. That is one element. So essentially, it's mainly Argentina with the lower BASL. It does not necessarily effect all the bottom line from that side, but there is a little bit of inflation in costs as well. Other things, seasonality in Russia is the other part. Q3 was the highest quarter. Q4 usually drops off a little bit. And then on the U.S. side, as we said, with the exhaustion of E&P budget for this year, and holidays coming up, and some weather delays, there will be a little bit of a reduction in the U.S. as far as we can see. That will be offset by some year-end product sales in the Eastern Hemisphere mainly, as we've seen last year as well. So these are the pieces of the puzzle.

Mark A. McCollum -- President and Chief Executive Officer

From a product-line standpoint, those year-end product sales completions, some of the transitory things that we talked about that should sort of slide in the fourth quarter will be in the production segment and possibly just maybe to lesser extent, but still there in the well construction, managed pressure drilling has some things lined up. So those will benefit. And of course on the completion side U.S., we may see a little bit of softness around cementation products and plugs, packers, things that are all line up with some lower spending on the overall unconventional completion side.

Byron Pope -- Tudor, Pickering, Holt-- Analyst

That's helpful. Thanks. Appreciate it, guys.

Operator

Our next question comes from Kurt Hallead from RBC. Please go ahead.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hello.

Mark A. McCollum -- President and Chief Executive Officer

Hi, Kurt.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey. I have a follow up question for you on the free cash flow outlook going out into 2019. I appreciate the commentary that's moving in the direction that you want it to. I was wondering if you'd be willing to share kind of a target range on free cash flow on '19?

I think it's pretty simple, Kurt. It's break-even. That's what we are going to. Mark went through that we need $1 billion on EBITDA in order to be cash flow positive throughout the year. And I think that we'll head toward that. And we'll see, with growth and revenue growth, that will eat a little bit that. So we need to do actually slightly better than $1 billion for next year.

Mark A. McCollum -- President and Chief Executive Officer

Right, but that's the key difference between '18 and '19 is that next year coming in and shooting at that break-even EBITDA or better, it's not coming by having to work the margins on working capital. Our expectation is that it's coming from EBITDA. We're internally working through the transformation to drive enough of that so even that with possibly investing a little bit back into working capital for revenue growth purposes, we can still achieve that mark.

Kurt Hallead -- RBC Capital Markets -- Analyst

Okay. Appreciate that color. Then secondly, Christoph, you mentioned that the interest expense will be down on a sequential basis. Can you just give us a handle on what's driving that?

It's simply the maturities of the interest dates on the bonds there. We try to flatten it out through the year, but it's not perfect. Q4 is a little bit lower than Q3, Q1 is usually the highest on the interest side, and Q2 is the lowest. It's simply whenever the coupons are due.

Kurt Hallead -- RBC Capital Markets -- Analyst

Great. Thanks. Appreciate that color. Thank you.

Mark A. McCollum -- President and Chief Executive Officer

Thanks, Kurt. Carol, can we take one more question? Hello? Carol?

Operator

Hello. I have no one else scheduled at there's time.

Mark A. McCollum -- President and Chief Executive Officer

All right then. Let's close the call.

Karen David-Green -- Vice President, Investor Relations

Thank you all for joining us on today's call. I will now turn the line back over to the operator for closing comments.

Operator

Thank you. This does conclude today's conference. You may now disconnect.

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